The U.S. District Court for the Central District of California has again ruled in an Employee Retirement Income Security Act (ERISA) lawsuit targeting the Walt Disney Company—concluding a motion to dismiss from the company should be granted.
In this instance the court, pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule 7-15, moved on the matter without oral argument, ruling that plan fiduciaries cannot be held liable for losses suffered by participants who had exposure to Valeant Pharmaceuticals stock at the time of that company’s dramatic fall from grace.
Background information included in the text of the district court’s decision states that the Walt Disney Company offers a number of retirement benefits to its employees, including a wide choice of retirement savings and investment vehicles. Among these is the plan including the investment option at question here, “which is a participant-directed individual account plan, meaning that individuals investing in the plan have an individual account which pays benefits based solely on the amount contributed by the participant.”
Important to note, “plan participants are themselves required to select the specific funds into which their individual contributions are invested … Plan participants are offered a choice of 26 different funds.” As a result, case documents suggest, plan participants can allocate their individual plan accounts among a number of investment options, reflecting a broad range of investments styles and risk profiles.
One of the investment options included in the plan is the Sequoia Fund, a mutual fund managed by Ruane, Cunniff & Goldfarb. As the new decision lays out, “Plaintiffs allege that the Sequoia Fund purports to be a value fund … Plan participants have invested more than $500 million in the Sequoia Fund, causing investments in the fund to account for approximately 12% of all plan assets not invested in Disney itself.”
Plaintiffs suggested that the Sequoia Fund eventually moved up to 25% of its net assets into investments in Valeant, leading to an unfortunate chain of events when Valeant’s accounting practices and investment strategies were called into question by state and federal regulators. In August 2015, Valeant stock closed at $262 per share, representing a trade value that was 98-times higher than its earnings. By November 17, 2015, Valeant stock precipitously declined to less than $70 a share, representing a loss of more than $65 billion in market value.
Because their initial arguments failed (that the plan fiduciaries should have known that a problem was brewing at Valeant and should therefore have moved to drop the stock), plaintiffs in their second amended complaint instead allege that plan fiduciaries should have known that Valeant had the “clear indicia of a growth stock,” and did not meet the Sequoia Fund’s purported investing criteria of seeking out value stocks. Thus they argue that plan fiduciaries should have moved, even before the Valeant accounting fiasco and subsequent losses, to vacate the plan’s investment in the fund, according to their various duties of prudence and loyalty under ERISA.
NEXT: Failed claims of fiduciary wrongdoing
Against this backstory, plaintiffs’ second consolidated complaint alleges two claims for relief. In the first claim, plaintiffs allege that the plan breached its duties under ERISA to prudently manage the plan by offering the Sequoia Fund as an investment vehicle. The second claim, which is derivative of the first claim, seeks to impose liability against both the plan and individual members of the plan committee for “co-fiduciary liability pursuant to 29 U.S.C. § 1105(a).”
In short, plaintiffs posit that “a reasonably prudent fiduciary in the plan’s position would have removed the Sequoia Fund as an investment option because it invested in a growth stock, despite holding itself out as a value investor.” Specifically, plaintiffs allege that “a reasonably prudent fiduciary would have carefully monitored the Sequoia Fund to ensure that it adhered to its purported investment strategy as described to investors in general and to plan participants in particular.”
Defendants contend that the classification between “growth” and “value” investment is immaterial to determining whether plan fiduciaries acted prudently by continuing to offer the Sequoia Fund as an investment option to participants. And beyond this, the parties dispute whether the Sequoia Fund even held itself out to be a growth or a value investor in the first place.
The court notes that “some of the arguments advanced by the parties purporting to show whether the Sequoia Fund was a value or growth investor border on being frivolous.”
For example, “plaintiffs assert that when a Sequoia Fund portfolio manager was asked if he intended to keep or reduce the fund’s position in Valeant, his answer that ‘we believe Valeant will continue to grow … and should do quite well,’ was a representation from the fund to investors that Sequoia was a growth play.” Similarly, the defendants claim that the Sequoia Fund “demonstrated its growth-orientation by announcing a focus on purchasing stocks that ‘have the potential for growth.’”
As the court explains, in reality “investors simply use these terms to describe their investments; not to also convey their overall investment strategy.” An investor “purchases a stock because he believes its share price will grow, and thus represents a good value at the time of purchase. It follows that, frequently, no deeper meaning can be ascribed to the use of these terms.”
In the end, the court agrees with the defendants, along these lines: “There is no authority to support the proposition that the ‘growth’ or ‘value’ styles of portfolio management are preferable to one another, or, as is more relevant here, would constitute a breach of fiduciary duty if pursued as an investment prerogative.”
The court explains that the “more relevant inquiry for determining whether the plan breached its fiduciary duty is to examine what representations the plan made to its participants about the Sequoia Fund, and whether the fund acted in a way so inconsistent with that description that a reasonably prudent investor would have discontinued offering the Sequoia Fund as an investment vehicle. Plaintiffs have failed to identify a single instance of the plan itself classifying the Sequoia Fund as a growth or value investor.”
This is latest in a string of victories for Disney in the potentially costly piece of ERISA litigation. An initial version of the complaint also argued fiduciaries should have dropped the fund from the plan investment menu because one of its underlying investments showed signs of trouble—without success.
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